Financial Times: Shale Oil and Gas

Opec production deal sets stage for rebound in output from North American drillers

Saudi Arabia’s energy minister said Tuesday that Opec had little to fear from an immediate recovery in the US shale oil industry, with production unlikely to rise substantially in the near future.

Khalid al Falih, speaking at the World Economic Forum in Davos, said that while US output has rebounded in recent months he did not believe the US could add 2-4m barrels a day to keep up with demand growth any time soon.

“What has been tapped recently is the most prolific areas,” Mr Falih said of the US shale industry. “As demand rises they will go to the more expensive, more difficult, less prolific areas in the shale and they will find that they need higher prices.”

His comments cut to the core of the most important issue facing the oil industry. Two years after Opec opened the taps to try and squeeze out higher cost rivals, the reversal of its policy in late 2016 has set the stage for a market recovery.

Traders and oil executives are now watching closely to see how fast a recession-hardened US shale industry picks up, with output having already rebounded since troughing in the middle of last year.

Kenneth Hersh, co-founder of NGP Energy Capital Management, said Opec had tried to take on US shale entrepreneurs in 2014 but had essentially “lost”, as US output was now rising again.

Before the price crash, the shale revolution helped boost US output by about 1m barrels a day between 2011 and 2015, threatening Opec’s most powerful members.

In a sign that some of the world’s largest oil companies are prepared to bet on a sustained shale recovery, ExxonMobil on Tuesday announced a $6.6bn deal to buy 250,000 acres in the Permian shale basin in Texas, which has emerged as the most prolific of the shale fields during the downturn.

Exxon’s new chief executive, Darren Woods, trumpeted the potential of its new shale asset, saying it could “generate attractive returns in a low-price environment” as “the dominant US growth area for onshore oil production”.

Saudi Arabia has continued to present a confident front since it agreed supply cuts with Opec and non-Opec countries at the end of last year.

Amin Nasser, chief executive of Saudi state-oil company Saudi Aramco, said the cuts to output should hopefully see the market balance by the end of the first half of 2017, solidifying a recovery that has already seen prices double in the past 12 months.

He said that while Opec, whose 13 members pump roughly 40 per cent of the world’s crude, still faced challenges, the world would need to invest $25tn globally in new oil capacity over the next 25 years, arguing demand would keep rising despite the predicted growth in electric cars.

“It will take decades for [renewables and electric cars] to replace petroleum resources,” Mr Nasser said, predicting oil demand would continue to rise due to heavy trucks, petrochemicals, aviation and shipping.